Fund Accounting in Family Offices

Fund accounting in Family Offices

Achieving reportable data that is accurate, scaled, and efficient is more than just a way to facilitate internal operations in your family office: it’s also a fiduciary duty to clients.

The structure of a family office is meant to combat siloed services and expertise, and instead combine them into a concierge service for Ultra High Net Worth (UHNW) Clients. 

Why, then, do services like fund accounting become siloed within a family office?  

Because in the past, a family office had no choice but to use a software application that was originally designed with narrow functionality for an adjacent industry such as a hedge fund or PE fund.

Now, there’s a choice.

Challenges in Fund Accounting

For family offices and other professional services, managing and accounting for funds is a fiduciary responsibility that requires accuracy, control, timeliness, and cost efficiency. 

One key challenge in fund accounting that family offices face is that the funds are deployed across a variety of investment classes and have a myriad of operating terms covering funding investments, distributions to investors, and economic and tax allocations that impact the investors’ financial value, liquidity, and risk of their position. 

Partnerships, Sub-S Corps, Limited Liability Companies (LLCs), Common Trust Funds and other multi-owner entities are a recognized way for family offices and other private investment companies to aggregate assets for investment purposes. The fund structure also provides tax advantages and flexibility in assigning economic benefits to the fund’s investors.

These complex operating terms are an ingrained challenge in family offices – operating terms that are a fiduciary responsibility to clients and require a family office to fulfill:

Accuracy in Fund Accounting

  • Are fund assets properly valued and incorporated in Fund Net Asset Value?
  • Is income & expense recorded in the proper period for allocation to investors under changing ownership percentages?
  • Are you allocating fund net income to investors under the terms of the operating agreement, including preferred allocations, special carve-outs, and segregated investment net income?
  • Is the calculation of performance fees, management fees, and carried interest consistent with the fund’s terms?
  • Have you properly recorded tax-specific events to make tax allocations and reporting in line with IRS guidelines?

Control in Fund Accounting

  • Do critical calculations (e.g., allocations and fees) undergo appropriate review and approval?
  • Are cash movements between fund and investors reviewed and approved by appropriate staff?
  • What audit trails exist to show complete transaction source information and trace who did what and when?
  • Are issues and exceptions highlighted for efficient corrective action?

Timeliness in Fund Accounting

  • Can you rely on automated, straight-through processing to collect and categorize source data?
  • Is the business process free from bottlenecks and reliance on a single individual?
  • Do you have an efficient closing process for multi-tiered structures?
  • Can you consistently hit investor reporting deadlines (including tax information)?

Cost Efficiency in Fund Accounting

  • Can you provide external services – such as audit, tax, regulatory – your information in a ready-to-use form to reduce their fees?
  • Are your business processes scalable?

Fund Accounting also poses risks to other internal operations of family office structures: errors in calculations and reporting, inconsistency between departments, and a lack of transparency for clients.

The Integration of Operations

Fund accounting, often thought of as a distinct service, cannot exist separate from other services. Fund accounting transactions impact the investment ledger, the general ledger, the tax ledger, performance measurement, partnership ownership, and so on. Ensuring accurate and accessible data, then, means a controlled process, a transparent ledger system, and measurable data. 

The key for mitigating the challenges of fund accounting, like the “Spreadsheet Abyss” and application silos is a single-source platform with the agility to incorporate the full capabilities – and expectations – of a family office, while streamlining both internal and client-facing processes and procedures.

What does that look like? Consistent data across departments, accurate reporting and transaction history, reduction of administrative responsibilities on C-Suite personnel, and an increase in client trust and satisfaction.